Declining Participation Rate A Function Of A Weak Labor Market

Today's report on jobless claims at 313,000 was higher than the expected level of 292,000. This level of claims was the highest since the week of September 20th when claims were reported at 295,000. This trend in claims would need to reverse going into year end or the higher trend would be an indication of a weakening job market.

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Further, today's weaker than expected report possibly speaks to broader weakness in the overall economy. Labor market conditions in the U.S. have been far from robust. The potential canary in the coal mine has been the steadily declining participation rate in the U.S. as noted with the blue line in the below graph. A number of economists have attributed the declining participation rate to the increase in retirements of the baby boomers. This conclusion is important for those that believe the decline in the participation rate is baby boomer related, otherwise, the decline would be attributable to an overall weak economy and labor market.

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Importantly, the baby boomer phenomenon is not isolated to U.S. demographics and was a result of the environment following World War II. As can be seen in the above chart, the participation rate in the U.K. has not seen the same level of decline as experienced in the U.S. In fact, if one looks at the U.S. headline unemployment rate compared to the U.K.'s in the chart below, both are at nearly the same level.

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In the U.S. the headline unemployment rate is known as the U-3 rate. The broadest measure is the U-6 which includes discouraged workers, all other marginally attached workers and those workers who are part-time purely for economic reasons. As displayed in the below graph, the U-6 unemployment rate equals 11.5% versus the headline rate of 5.8%. The U-6 unemployment rate remains at a level higher than the 8% reached prior to the last recession.

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An article earlier this year in The Economist magazine discussed the strength of the U.K employment market noting,

"The recovery is impressively robust. Employment set a new record in the three months to November, reaching 30.1m. The number of Britons in work has risen by fully 280,000 since the summer. Unlike in America, where unemployment is declining in part because discouraged workers are dropping out of the labour force, inactivity is declining in Britain. The share of people in work is within striking distance of an all-time high. Job growth has been strong across private industries; unemployment is falling for all age groups."

The Economist magazine article comments on the decline in the U.S. unemployment rate being a result of workers dropping out of the labor force.

In conclusion, the health of the U.S. labor market is anything but robust and indicative of a below potential growth in GDP. Ancillary support programs, such as food stamps and disability insurance, continue to show increasing and high levels of usage. The decline in the participation rate in the U.S. seems to be more a function of a somewhat weak labor market than an increase in baby boomer retirements.

From The Blog of HORAN Capital Advisors